Bank of Canada Governor Tiff Macklem arrives for the annual meeting of federal, provincial, and territorial finance ministers in Toronto on Friday, December 15, 2023. A slowing economy is expected to lay the groundwork for interest rate cuts as early as mid-2024, which would signal a turning point in the fight against inflation.

Image Credit: THE CANADIAN PRESS/Nathan Denette

OTTAWA - As another inflation-fighting year wraps up, the Bank of Canada's quest to restore price stability is expected to begin drawing to a close in 2024.

The central bank's hefty rate hikes are finally bearing fruit, allowing it to hold its key interest rate steady at five per cent over the last few months.

Higher borrowing costs have caused a pullback in business investment and consumer spending, making way for lower inflation.

The economic slowdown is expected to lay the groundwork for interest rate cuts as early as mid-2024, which would signal a turning point in the fight against inflation.

Desjardins' chief economist says although the central bank's rate hikes have helped get a handle on inflation, a lot of the slowdown in price growth has also come from global price pressures easing.

"We're looking at inflation 3.1 per cent, now much less stressful than it was a year ago," said Jimmy Jean, chief economist at Desjardins.

"And, part of it, I think, is yes, the actions the bank has taken. But another part is also things that were expected to (resolve) in their own right."

Many of the global factors that contributed to the steep runup in prices, like mangled supply chains and high energy prices, have faded away.

And now high interest rates are doing the rest of the work.

Restoring price stability will be welcome news for Canadians, particularly lower-income households who been the hardest hit by climbing grocery bills and rents.

But getting back to low and stable inflation won't come without some pain.

Variable rate mortgage holders were the first to feel the pinch of rate hikes. But as time passes, that squeeze is slowly spreading to other homeowners as well.

More Canadians are expected to renew their mortgages next year at higher interest rates, forcing them to cut back on expenses elsewhere.

Paul Beaudry, a former deputy governor at the Bank of Canada, says this speaks to the unequal effects of both inflation and interest rates.

"The tools that are used at the Bank of Canada, especially the interest rate, hits people very, very differentially," Beaudry said.

"On one part, you mustn't forget those groups that actually benefited by bringing (inflation) down. At the flip side, you have other groups that were more hit (by rate hikes)."

According to researchers at the Bank of Canada, about 45 per cent of mortgages that were taken out before the central bank started raising rates had seen an increase in their payments by the end of November.

The researchers say nearly all remaining mortgage holders in this group will renew by the end of 2026, likely meaning higher payments for them as well.

This wave of mortgage renewals is expected to have a chilling effect on the economy.

Forecasts suggest economic growth will be weak in 2024 before picking up again toward the end of the year.

Desjardins is projecting a mild recession in the first half of the year, while other forecasters expect the economy to keep its head slightly above water.

But if the economy skirts a recession and inflation falls back to two per cent, it will mean the central bank successfully walked the tight rope between raising rates by too little or too much.

For workers, a weaker economy will mean fewer job opportunities available and potentially slower wage growth.

The unemployment rate has crept up to 5.8 per cent in November and is expected to continue rising next year.

Desjardins is forecasting the unemployment rate will peak at 7.0 per cent in the third quarter next year.

The Bank of Canada has faced a lot of scrutiny over the last couple of years, particularly from the political realm, for its policy decisions since the COVID-19 pandemic hit.

Conservative Leader Pierre Poilievre notably vowed to fire governor Tiff Macklem, blaming the central bank for the run up in inflation and accusing it of financing government spending.

Others, including New Democrats and premiers, have spoken out against the rapid rate hikes because of the financial squeeze they would cause for families.

Beaudry says the politicization of the central bank during this period of high inflation reinforces why it's important to have a central bank that can make the right decisions, regardless of how unpopular they may be.

"I'm not surprised how much it gets politicized during an inflation period. What I think is the important part is to see how once this is over, and people look back, what credibility the bank will have. My guess it will have quite a bit of credibility," Beaudry said.

This report by The Canadian Press was first published Dec. 24, 2023.

News from © The Canadian Press, 2023